What the Budget Profits Tax increase means for you: how small investors will be affected

Rachel Reeves announced an increase in capital gains tax for retail investors, which would see tax on shares increased to match the higher rates currently paid on property.

Reeves outlined the new rules in her long-awaited autumn budget, saying capital gains tax would be increased from 20 per cent for those paying higher tax rates to 24 per cent.

But it was basic rate taxpayers who would take the biggest hit, as their tax rates on capital gains would skyrocket from 10 percent to 18 percent.

We look at what capital gains tax is and what the changes mean for investors.

What is Capital Gains Tax?

Capital gains tax, known as CGT, is charged on profits on assets including shares, second homes, buy-to-let and some personal belongings.

There is an annual tax-free capital gains allowance of £3,000 and tax is charged on gains above that. Losses on the sale of investments can be deducted from gains on others.

Although capital gains tax is separate from income tax, the rates are determined by people’s income tax brackets and profits are added to other income to determine the rate paid.

Basic rate taxpayers previously paid 10 per cent CGT, while higher and additional rate taxpayers paid 20 per cent.

As of today, rates have increased: Basic rate taxpayers now pay 18 percent capital gains tax and higher and additional rate taxpayers pay 24 percent.

There were already higher rates for profits from second homes and owner-occupied homes, of 18 percent for taxpayers with a basic rate and 24 percent for taxpayers with a higher and additional rate.

Therefore, today’s changes mainly affect those who invest in the stock market.

A separate rate applies to entrepreneurs who sell companies. The business asset disposal exemption means they pay 10 per cent tax on profits up to £1m. This will also increase rates, but not immediately. The CGT for entrepreneurs will increase from 10 percent to 14 percent in April 2025 and then to 16 percent in April 2026.

> How capital gains tax works: what is levied and how much you pay

Why did Labor increase capital gains tax?

The move is part of Labour’s pledge to plug a £22 billion ‘black hole’ in the country’s finances and was announced alongside a number of other tax increases.

According to Reeves, the increase in capital gains will raise as much as £2.5 billion to help tackle the deficit.

> How to protect your wealth from the Labor budget tax attack

When will there be changes to capital gains tax?

According to the Ministry of Finance, the new capital gains rates will come into effect from today, October 30, unlike in the new tax year.

Forms are coming in immediately for capital gains tax increases. Tory Chancellor George Osborne increased the levy in 2010, with the increase set from midnight after the Budget.

This is to prevent massive asset sales ahead of the new rules.

SIMON LAMBERT: This is a tax attack on small investors

This is Money’s Simon Lambert: ‘Rachel Reeves has imposed a big rise in capital gains tax on investors’ profits.

‘Capital gains tax has not traditionally been an issue for many small investors as the tax-free annual allowance was quite generous at £12,300.

‘Unfortunately, that situation changed dramatically after Jeremy Hunt reduced the annual tax-free capital gains allowance to just £3,000.

‘This means Rachel Reeves’ rises have the potential to hit the UK’s army of small investors, who have built up long-term shares through working share savings schemes and legacy certificates, which are unlikely to be protected by an Isa wrapper.

‘Her move underlines how important it is to take advantage of a shares Isa when investing, which protects you from tax on profits and dividends.’

> How to find the best and cheapest shares Isa

Who will the CGT increase affect?

The government said it will ‘ensure the UK tax system remains internationally competitive, with nominal rates below those of France, Germany and Italy.’

It added that the tax is paid annually by less than one percent of adults. HMRC data shows that 369,000 people paid capital gains tax in the 2022/2023 tax year, raising £14.4 billion.

However, these figures refer to a time when capital gains tax deductions were more than four times what they are today.

The tax free allowance was previously reduced under the Conservative Government from £12,300 to the current £3,000.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said: ‘Talking about things like capital gains tax as ‘wealth tax’ obscures the fact that many people on average incomes, who have invested carefully throughout their lives, could face a tax bill when they rebalance or sell their portfolios to cover their costs later in life.

‘The £3,000 annual allowance isn’t particularly far-reaching if you’re selling an investment you’ve held for 30 years or more, so investors should consider how they can protect themselves.’

She added: ‘Investors are also dealing with the fact that frozen income tax thresholds have pushed more people into paying a higher tax rate, automatically raising their capital gains taxes. A combination of all these things means more people will have to pay more of this tax.”

Tax-free investing was cut back by former Chancellor Jeremy Hunt

According to Görkem Barron of Lubbock Fine Wealth Management, this move could also reduce equity investment.

She said: ‘Such a large increase in CGT will have an impact on retail investors – it discourages investment in shares. There is a real danger that this will erode the share ownership culture in Britain.”

‘There is a particular risk that stocks focused on capital growth – particularly in the UK technology sector – will be hardest hit. Smaller technology shares in the UK are benefiting hugely from retail investment – ​​and the Chancellor has now made investing in technology much less attractive.”

Simon Merchant, CEO of savings platform Flagstone, agrees: ‘Investors must now choose which investments to keep and which to divest to minimize the impact of higher CGT liability further down the line. More than a third of Flagstone savers expect to invest less now or in the future as a result of the CGT change.’

How can you reduce your CGT bill?

Using tax-efficient investment packaging can go a long way toward reducing or eliminating capital gains taxes. For many investors, the £20,000 Isa allowance and £60,000 pension allowance can cover the majority of their investments.

Investors should also consider taking full advantage of their annual capital gains tax exemption of £3,000 each year, potentially shifting their investments to Isas.

Myron Jobson, from Interactive Investor, said: ‘The double whammy of April’s major CGT fee cuts and the rise in CGT rates are providing investors with an extra impetus to do what they should already be doing: get the best from tax-efficient wrappers. such as Isas and pensions, which protect profits and income from investments from tax.’

Some investments are free from capital gains tax and may prove more popular.

Chris Rudden, head of UK investment advisers at digital asset manager Moneyfarm, said: ‘It is more important than ever for investors to manage their assets strategically to minimize the impact.’

He added that investors should “consider investing in government bonds, which are exempt from CGT, which could be a sensible move.” It is also worth exploring the possibility of ‘locking in’ profits at current rates before the new rates come into effect, thus providing a higher base for future calculations.”